Home Weekly Roll Up Are the expectations for Tax Revenues too high?

Are the expectations for Tax Revenues too high?

Premised under the guise of the empowerment of the under represented class, New York Governor Andrew Cuomo recently unveiled his plan to end cannabis prohibition in New York State. In a similar vein, New Jersey Governor Phil Murphy has echoed these sentiments by repeatedly stating that social justice is the primary factor in his state’s legalization efforts.

But the driving force behind both Governors’ stances on cannabis reform appears to be identical – the massive tax revenues expected to be generated by legalizing and regulating cannabis. Indeed, the roadmap from states such as Colorado and California, where sales revenues eclipsed $1.5 billion and $2.5 billion respectively in 2018, are illustrative of this trajectory.

Governor Cuomo’s plan attempts to mimic the framework in place in such states – i.e. a tax of 20 percent on the state level; a 2 percent county tax on transfers from wholesalers to retailers; a $1 per gram tax on dry flower for cultivators; and a $.25 per gram tax on trim. Based on these figures, the Governor expects legalization to generate tax revenue of approximately $300 million from cannabis legalization and regulation.

However, the Cuomo administration may be counting their chickens before they hatch. This expectation is premised, in part, on a proposal that would grant New York’s counties and cities, with over 100,000 residents, the autonomy to decide whether to allow recreational retail operations in their respective neighborhoods. Based on this proposed legislation one town in Nassau County has already amended its zoning code to restrict the sale of recreational marijuana within its borders. It remains to be seen whether this zoning regulation will have a greater impact on the town than the Governor’s estimations.

New York wouldn’t be the first state to be off the mark in its revenue prognostications. Colorado’s prediction of over $118 million in cannabis revenue fell woefully short in its first year of legalization by hauling in roughly $67 million and California, which was expecting close to $1 billion in revenue in 2018 had only achieved 25 percent of that goal through the end of September 2018. However, if Cuomo’s proposed 20 percent state tax is enacted, New York could close in on the Governor’s revenue predictions.

In the state versus state race to legalization of recreational marijuana, New Jersey seems to be closer; however a power struggle over taxation could stymie a New Jersey bill that would legalize recreational marijuana. Specifically, Governor Murphy is seeking to impose a 25 percent tax on marijuana businesses which is more than double the 12 percent contained in the current bill. (If New Jersey’s bill passes as written, it will be the lowest marijuana tax in the country.)

Notwithstanding the uncertainty surrounding the feasibility of meeting these ambitious projections, one theme is clear – the need for substantial federal marijuana reform is necessary.

Robert Volynsky

Robert Volynsky

Robert Volynsky is an associate in the firm’s Litigation Department. Mr. Volynsky engages in securities and general commercial litigation in both state and federal courts and before regulatory agencies, including the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
Robert Volynsky

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    Anthony Ciaccio

    Anthony Ciaccio

    Mr. Ciaccio has advised start-up companies on entity formation, trademark and patent applications and preliminary clearance during an entrepreneurship and intellectual property clinical practicum.
    Anthony Ciaccio

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